Outside of the largest startup regions, the role of stock options/equity compensation is often unappreciated. Salary always gets the most attention, for obvious reasons, followed by benefits, and lastly equity.
Why doesn’t equity and “upside” get the same amount of interest? Simple: without local stories and lore of “regular” people getting wealthy from stock options, they don’t occupy any mindshare. Unfortunately, it’s a foreign concept and doesn’t fit the typical model of being paid in a way where you can promptly spend it. Plus, add in the fact that being short-term focused is a normal quality, waiting years or decades for a potential payoff doesn’t get many people excited.
How do you set team member expectations about the potential value of equity? Start by equating it to more commonly appreciated financial markers and then provide specific details. Let’s look at some example expectations.
Ah, the unusually satisfying smell of a new car — a sign of success and accomplishment for many people. When startup equity has the potential payout to a buy a new car, set the ballpark expectations. If the startup does well, this is the type of value you can expect from the stock.
Still the American dream for millions of people, the goal of home ownership is a major aspiration. While it often requires a much greater level of startup success, there’s a chance that this equity will turn into enough cash to buy a new house, debt free. Set the appropriate expectation and what level of exit valuation is necessary for this possibility.
Financial freedom (FIRE!). The rarest, of course, is the outsized-outcome that creates enough wealth for a new life, however that’s defined by the individual. Usually, this happens when a startup sells or goes public for billions of dollars. While possible, set expectations accordingly.
Yes, most startups fail and most entrepreneurs don’t make any money after they raise venture capital. But, it’s a game of power laws and the winners can exceed the wildest dreams. Set expectations with team members around the potential value of their equity and connect it to common financial markers like new car, new house, and new life.
One thought on “Startup Equity Expectations: New Car, New House, New Life”
The dismal number of companies achieving liquidity events or even survival offsets the appeal of equity payoff for employees and founders. With investor terms that crush employee equity, exits like rare IPO are one of the events that pay off for employees with equity. Hence the value of short term value of salary and other realistic benefits to employees and their families.